The government’s budget deficit failures are set to slug 25—34 year olds with an extra $100,000 of lifetime taxes. This finding comes courtesy of a new Grattan Institute report, which highlights the challenges facing young Aussie households.
If the plan is to fix the budget by taking from those least capable of shouldering higher taxes, they’re going about it the wrong way.
When the government announced a $40 billion deficit in the latest budget, our future prospects looked grim. Yet the government was quick to reassure voters they would fix the deficit as early as 2020.
Taxes, and rising economic growth rates, would get the budget back in the black. Or so they said. But it was clear they were overshooting the potential impact of both factors by some margin.
For one, their forecast for future budgets was based on economic growth rates of 3.5%. But how realistic is that? Considering we’ve only managed to pass that threshold five times in the last 15 years, I’d say not very.
What’s more, three of those occasions came at the height of the mining boom. Now that the boom resembles more of a bust, those forecasts look hopelessly unrealistic. Even projections for this year put economic growth at a meagre 2.5%. That’s far below the target necessary to fix the budget deficit in the long run.
Any hope that such paltry growth rates could improve in the future seem idealistic. Instead, the government seems to be hoping for the best, without any real idea for tackling the deficit effectively.
Their approach, over the next four years, in trying to do so doesn’t inspire much confidence either.
This tax plan of theirs centres around young workers moving up into higher tax brackets in the next few years. Supposedly, this would rake in an extra $25 billion from payrolls by 2019. That would equate to roughly half the current deficit. But this doesn’t seem like a viable way of expanding the revenue base.
It could work in an environment in which wages are growing. But considering that wage growth is rising at its worst level in decades, this seems fanciful on the government’s part.
Nonetheless, their tax grab will still leave low to middle income households worse off in the long run. It’s not likely to make a huge dent in the deficit, but that won’t stop them from trying.
So that’s what young Aussies have to look forward to then. Years of worsening economic conditions, unaffordable house prices, and higher taxes will become the norm.
What the government needs to do to fix the deficit
According to the Institute, the government will need to take tough measures if it’s serious about repairing the budget deficit. But it would need to be equitable in the way it goes about it.
Younger generations shouldn’t face most of the burden at a time when the cost of living is rising. That’s especially true considering they are most susceptible to rising costs of living. Anything which prevents them from spending is bad news for the economy as a whole. That’s because younger demographics buys new cars, houses and other goods more than any other.
Instead, the Institute suggests the government could look at hiking GST rates, removing super concessions, and changing rules on negative gearing.
Any one of these is unlikely to prove popular among voters.
Not only that, but there’s no real way of knowing as to whether such measures would be enough to push the budget back in the black. There are still too many underlying problems with the economy that are getting worse, not better.
The terms of trade, so important to the budget, fell by 2.9% in the first quarter. In the last year, our trade deficit has slumped by 11.4%. As a nation, we’re importing far in excess of what we export. That means we can’t rely on exports to keep the trade surplus as high as it was during the mining boom.
Then there’s the small issue of spending. Total spending across the economy has fallen by 3.4% in the past year. Industries are holding back because the conditions for doing business are deteriorating. And it’s not just businesses cutting back on spending. Recently, even the IMF called on the government to increase spending on infrastructure. By neglecting to do so, they’ve already squandered an opportunity to increase growth by several percentage points in the future.
And what do we make of our demographic problem? Australia is a rapidly ageing nation. The rising demand in healthcare services stemming from this will lead to more government spending, not less. That means that an ever larger share of tax revenues will need to be reserved for aged care.
All this ensures that the government’s two-fold plan looks destined to fail. They will tax more people because they have no other recourse. And the worst hit will be the youngest households.
However we can dismiss any idea that economic growth rates will send the budget back in the black. Growth rates are likely to remain at decade lows and, if anything, will only worsen in the coming years. The prospects for a recession are much higher than those of farfetched 3.5% growth rates.
The Daily Reckoning’s Greg Canavan predicts that the slump towards a recession has already begun.
In a free report, ‘Australian Recession 2015: Unavoidable’, Greg reveals why growth levels will fall sharply over the next three quarters. Government revenues are down, household debt is up, and business spending is falling too. On top of that, we have a worsening trade deficit that’s dragging on the national income.
But there is hope for anyone who takes the effort to shield themselves from the recession. Greg will guide you through the necessary steps you need to take to protect your family’s wealth. He’ll show you how to allocate your asset portfolio to make it recession proof. To find out how to download the report right now, click here.
Contributor, The Daily Reckoning